FTC can crack open secret patent deals to learn about a shadowy business.

Last December, the Federal Trade Commission held a workshop about patent trolls. Dozens of corporations, interest groups, and individuals have now submitted public comments about the issue.

In the past week, it's become clearer than ever that government interest in the issue is growing, not fading. Two key FTC directors revealed at a legal conference last week that they're in favor of opening up a so-called 6(b) investigation about whether patent trolls, which the FTC calls "patent assertion entities," are stifling competition. That would allow the FTC to use its subpoena powers to collect information that's not available to academics, journalists, and others who write about patent troll activities.

For instance, once such an investigation is underway, the FTC would be able to get the details of confidential litigation settlements made with trolls both large and small. It could find out when trolls are splitting their revenues with operating companies or larger aggregators like Intellectual Ventures. It could find out how much money really goes back to inventors. That is an important issue, since many patent-assertion entities claim their business model is justified because they help the "individual inventor" get fair payment for their ideas.

Just moving ahead with such a study would be a victory for the groups, including tech companies, that are asking for more government scrutiny of the patent troll issue. In comments [PDF] submitted jointly by Google, Earthlink, Red Hat, and Blackberry, the companies specifically requested such a study; in particular, to investigate the prevalence of "outsourcing" patent attacks by operating companies. The Computer and Communications Industry Association [Comments, PDF] and the National Restaurant Association [Comments, PDF] also asked for such scrutiny.

"The biggest problem with the troll issue is the lack of information," said David Balto, a former FTC policy director who now has a private antitrust practice. "Through the 6(b) power, they can figure out the relationship between the patent trolls, and the firms they're acquiring patents from."

Balto submitted comments to the FTC on behalf of the restaurant group and the Food Marketing Institute. It's telling that such groups felt compelled to comment on this issue at all, and it suggests the economy-wide scope of the patent troll problem. The National Restaurant Association comments suggest that the FTC use its powers to conduct a 6(b) study focused on:

The full ownership interest of PAEs and a list of all subsidiaries and affiliates;

What are the relations between PAEs and the owners of the patents and how do the owners benefit from patent enforcement;

What are the type and scope of demand letters used by PAEs;

How often is litigation by PAEs successful; at what stage is litigation typically resolved;

How are patents acquired by PAEs and from whom; what is the purpose of these transactions; and

How does the PAE determine which patents to acquire.

If the FTC does move ahead and collect more information on this issue—and its unlikely the directors would have publicly said they support it if they didn't have support on the Commission—that doesn't mean all the information listed above will become public. Rather, the FTC will create a public report with aggregated and averaged information, so anyone looking for a spreadsheet detailing the finances of every patent assertion entity will be disappointed.

Having said that, much of the information listed above really should be public. Patents are monopolies granted by a government agency that should represent citizens first; courts have long been too obliging about allowing both PAEs and operating companies to keep information secret about patent assertion. Patent owners are fond of using metaphors about owning land when they want to win a lawsuit, but have strongly resisted providing the kind of disclosure available to the public in real-estate records.

The news was first reported (subscription only) in Global Competition Review, a journal covering antitrust and competition law. The directors who said they favor conducting the study are Howard Shelanski, who directs the FTC bureau of economics; and Richard Feinstein, who directs the bureau of competition.

40 Reader Comments

Balto submitted comments to the FTC on behalf of the restaurant group and the Food Marketing Institute. It's telling that such groups felt compelled to comment on this issue at all, and it suggests the economy-wide scope of the patent troll problem. The National Restaurant Association comments suggest that the FTC use its powers to conduct a 6(b) study focused on:

Now there's a group you wouldn't think patent trolls would even bother with.

This is a nice step in the right direction, and I'm very happy to see an FTC with more gumption, but using one government agency to fight the effects of another seems inefficient. Seems like it would just be easier to pass comprehensive patent reform (e.g., dramatically higher burden of proof, crowd-sourcing the hunt for prior art, no software patents, no gene patents)

And yeah, as the previous commenter stated, then restore copyright limits back down to a decade or two, and shift focus to them.

Balto submitted comments to the FTC on behalf of the restaurant group and the Food Marketing Institute. It's telling that such groups felt compelled to comment on this issue at all, and it suggests the economy-wide scope of the patent troll problem. The National Restaurant Association comments suggest that the FTC use its powers to conduct a 6(b) study focused on:

Now there's a group you wouldn't think patent trolls would even bother with.

This is a nice step in the right direction, and I'm very happy to see an FTC with more gumption, but using one government agency to fight the effects of another seems inefficient. Seems like it would just be easier to pass comprehensive patent reform (e.g., dramatically higher burden of proof, crowd-sourcing the hunt for prior art, no software patents, no gene patents)

Maybe when we get a new set of Congress critters it would be easier to pass reforms.

While I applaud any additional scrutiny/heat on patent trolls, this doesn't sound like the right approach. Finding out how much of the money goes back to "inventors" does diddly squat good if the inventor's invention is bogus. And the FTC is completely unsuited for determining patent bogosity, which requires assessing prior art and obviousness within specialized fields like computer science.

I don't care if 100% of the revenues are going to a poor inventor in a garage- if that inventor invented "scanning to email" or "buying with one click", then they should REMAIN poor.

If the FTC moves ahead with an investigation of patent trolls it is doubtful the FTC can do more than issue fines. What the trolls really should fear is the FTC issuing a report that says major reforms or abolition of patents in whole or in part should be considered. That could spur Congress (aka America's Native Criminal Class per Mark Twain) to actually do something meaningful.

This is a nice step in the right direction, and I'm very happy to see an FTC with more gumption, but using one government agency to fight the effects of another seems inefficient. Seems like it would just be easier to pass comprehensive patent reform (e.g., dramatically higher burden of proof, crowd-sourcing the hunt for prior art, no software patents, no gene patents)

And yeah, as the previous commenter stated, then restore copyright limits back down to a decade or two, and shift focus to them.

I agree that the patent system is broken and needs reforming; however I'd certainly rather this study goes forward so the reforming process is better informed.

While certainly in some areas patents might seem obsolete, that is a red herring I think, because the root problem is simply the granting of patents for non-exceptional work. Patents have to be *special*, not the rubber stamp you apply to every week's work. They just have to apply the "unobvious" and prior-art law that is already there to a considerably higher standard.

My favorite example of the kind of thing patents are made for is Lonnie Johnson's Thermoelectric Energy Converter, which is still in development. Here is a truly new, amazing new kind of heat engine with no moving parts, that could conceivably someday be a link the chain that processes almost all our power. But it is going to take years and years of development, and how are they going to get the capital to do that development if the investor knew that any cheap third-world company in the world could just pick up the final product design and put them out of business right out the door? Hmm? Software shouldn't be different, but you should have to have something special to be given that protection.

This is a nice step in the right direction, and I'm very happy to see an FTC with more gumption, but using one government agency to fight the effects of another seems inefficient. Seems like it would just be easier to pass comprehensive patent reform (e.g., dramatically higher burden of proof, crowd-sourcing the hunt for prior art, no software patents, no gene patents)

And yeah, as the previous commenter stated, then restore copyright limits back down to a decade or two, and shift focus to them.

I agree that the patent system is broken and needs reforming; however I'd certainly rather this study goes forward so the reforming process is better informed.

I'm on board with this. The problem with making any kind of reform decision is that it's hard to understand how the ripples from the decision will propagate. There might be unintended consequences that have an effect on many things.

Imagine wearing a suit connected to a bunch of wires connected to those rolling medical bag drip stands standing around you in all directions. If you try to move in any one direction, you risk tipping the rest, so you have to be very careful about the way you move and not move too suddenly. Investigating the situation is the first thing any governmental body should do before making decisions.

Granted, I think patent trolls are abhorrent pustules on the face of Lawyerdom and should not be able to engage in mobster style thuggery, but the problem needs to be handled with care or we risk toppling the whole system.

While I applaud any additional scrutiny/heat on patent trolls, this doesn't sound like the right approach. Finding out how much of the money goes back to "inventors" does diddly squat good if the inventor's invention is bogus. And the FTC is completely unsuited for determining patent bogosity, which requires assessing prior art and obviousness within specialized fields like computer science.

I don't care if 100% of the revenues are going to a poor inventor in a garage- if that inventor invented "scanning to email" or "buying with one click", then they should REMAIN poor.

This is the critical issue - issues like whether it's some NPE or a huge tech company filing the lawsuit or where the money is going are really (interesting, but) secondary concerns - what's far more important is that the patents in question are usually nonsense anyway.

The problem with the patent system is mostly in the fact that the patent office issues a lot of patents that it shouldn't.

If they fixed the patent office so that their job was no longer to grant patents but to protect important discoveries, it would help a lot. The problem is that the patent office's mentality is that it is supposed to issue patents.

Am I the only one skeptical about the publication of such a move? Doesn't a "we're thinking about a 6(b) investigation" give patent trolls time to cover their tracks? If they actually wanted to find things out, they'd run it quickly and silently.

I'd like to know the details about the deals cut with Microsoft, such as when Barnes and Noble crumbled after initially opposing Microsoft's bogus patents. These deals seem to throw in admission of patent validity along with other carrots (in BN's case bailing out the sinking Nook), so they don't seem completely above-board to me. Patent trolls are bad, but the patent assault on open source is worse, since the patents are usually not disclosed and no one knows how bogus they are. If the patents are bogus, they need to be shot down. If they're real, open source needs to quit using them. But if patents are only revealed under NDAs and back-room deals, and Microsoft gets struggling companies to admit the patents are valid (and even pay a per-device tax to use open source) something is just not right. There needs to be more sunlight on all this, not NDAs and back-room deals.

This is a nice step in the right direction, and I'm very happy to see an FTC with more gumption, but using one government agency to fight the effects of another seems inefficient. Seems like it would just be easier to pass comprehensive patent reform (e.g., dramatically higher burden of proof, crowd-sourcing the hunt for prior art, no software patents, no gene patents)

Well it appears that it's more likely that we'll get this one than patent reform, and it should serve as the first step where government institutions start to admit that something is amiss with the current rules.

Sigh ... I really don't see this helping at all. Ok, so they shift a percentage of the troll's lawsuit income to some Joe Blow down the food chain; big deal. The trolls will then just be more agressive to make up for lost income. Many people have it right; either get rid of the system or stop the rubber stamping.

Personally, I think we need some sort of protections for invetors so they can reclaim their investments. Today it is so easy to reverse engineer just about anything that knock offs will be on the market faster than the actual inventor can produce them. Given size and scope differences I'd see us moving from patent trolls to rip off trolls. The app stores on either side of the phone market are proof enough of this trend. However, we' need to be sensible about the whole process. Limit the exclusion time. Make it where only the patent holder can own and license the patent (not everybody has a large manufacturing plant, guys), ownership of any sort is non-transferable, use it or lose it, GET EXPERTS IN THE DAMNED PATENT OFFICE!, make sure the patent office knows math is not patentable, make sure the patent office knows what math actually is, the same goes for naturally occuring things such as genes and plants, overly broad patents are rejected out of principal, bad patents carry a wasting-our-time fine (which can be appealed), reintroduce the death penalty for insurance adjusters .... wrong book. Oh, yea, stop issuing multiple patents for the same thing AND get rid of the presumption of validity that goes with a patent; if a patent can't stand up to a fair reexamination then it was probably not a good patent. Hmmmmm ... also, I'd like a Ferarri, a house in the Virgin Islands, and a giant mecha while I'm dreaming.

Why investigate? The patent trolls aren't doing anything illegal, and it's the legality of the trolling itself which is the problem.

Rather, why not answer the problem with a ruling from the FTC along these lines: the constitutional authority to grant patents is "to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries". A patent that is useless or a hindrance to progress of science or the useful arts is then beyond the authority of the government to grant and invalid. So, why not take a two-pronged approach and: set criteria that can identify patents whose burden on progress far exceeds the effort required in their realization, and, second, a protocol whereby a patent can be bought by the government and transferred to the public domain explicitly as a means to promote progress.

Why investigate? The patent trolls aren't doing anything illegal, and it's the legality of the trolling itself which is the problem.

The FTC's mission:

To prevent business practices that are anticompetitive or deceptive or unfair to consumers; to enhance informed consumer choice and public understanding of the competitive process; and to accomplish this without unduly burdening legitimate business activity.

I would say that patent trolls are both anti-competitive and an undue burden on legitimate business activity. The FTC is well within their authority to study these patent entities.

The unfortunate raelity is that the patent office allows too many crappy patents through. I know inventors complain about how long it takes to prosecute a patent but it is far better totake longer than then deal with the garbage that gets admitted.

As for the non-prafticing entities, if you are not making a product or actively licensing (I'm thinking of how ARM designs and licenses their chips as opposed to designing and manufacturing) then they don't get to pursue any lawsuits. However, the comprehensive changes to IP law that the US needs are unlikely to happen any time soon.

While certainly in some areas patents might seem obsolete, that is a red herring I think, because the root problem is simply the granting of patents for non-exceptional work. Patents have to be *special*, not the rubber stamp you apply to every week's work. They just have to apply the "unobvious" and prior-art law that is already there to a considerably higher standard.

Software shouldn't be different, but you should have to have something special to be given that protection.

The problem with that is that the patent office grants software patents for applying general techniques to new systems and/or combining a number of methodologies/processes together, and as virtually every software developer can tell you.. That is what developing software is.

I know it is radical step. But why not just place a law that says essentially "You can not defend a patent with litigation unless you are an originator of a patent or using the patent actively in the marketplace".I know that is hardly going to stop everything, but it would be at least one step towards stopping these purely troll law firms that buy up patents from bankrupt companies just to sue people.

Also maybe consider making software not patent-able, but push them into the "trademark" realm.

I think patents should be completely available to the public along with all supporting information in some form of database. This would then allow the public to perform the research necessary to find out if a patent exists for whatever idea they have thus giving them the power to either license the patent, build a workaround, or challenge the validity of the patent in question.

In the case of a challenge, the initial inquiry is made by the patent office which sends out a notice of validity check, an approximate timeline for completion, and the steps involved. After this, the entity challenging the patent can then avail themselves of the courts to determine validity.

Or something similar, but right now the patent system is a mess. and need some kind of reform, although abolishing the system outright is a bit too harsh, limiting the duration and exposing the contents of patents is a step in the right direction in my opinion.

There was a reason these things were severely limited when originally implemented and I'd like to see a return to that philosophy. Patents, and copyrights were never meant to be lifetime revenue streams.

Maybe when we get a new set of Congress critters it would be easier to pass reforms.

I LOLed. changing the guard doesn't do squat. when you can make it so that lobbyists (aka people handing out BRIBE MONEY) can no longer BUY legislation, and instead have to actually debate things properly, THEN we'll see change.

Balto submitted comments to the FTC on behalf of the restaurant group and the Food Marketing Institute. It's telling that such groups felt compelled to comment on this issue at all, and it suggests the economy-wide scope of the patent troll problem. The National Restaurant Association comments suggest that the FTC use its powers to conduct a 6(b) study focused on:

Now there's a group you wouldn't think patent trolls would even bother with.

Why wouldn't they bother with them? They're already going after small offices (scan and email, wireless access points/routers). The entertainment industry has a lot of money. As time goes on and more ridiculous patents get granted and more industries use technology we'll see more industries targeted by technology patent trolls. Especially so when the newest fad seems to be targeting the users of technology versus the makers of technology.

As with any operation of this sort you start small to set precedent where the opposition can't afford to fight. Once you have precedent that gives you ammo to support your cause going after bigger fish. Telling that judge how 50 companies are already licensing your technology so this larger company should also carries more weight than just telling them that this large company should. Even if you never move on to larger entities, getting money from the smaller ones is easier than the larger ones.

(Note, I'm not supporting this method, but it seems to be what we've seen happen.)

There has always been a very odd and interesting tension between patent and antitrust, the law for creating legal monopolies and the law for striking down monopolies. Prior to 1982 (when the Federal Circuit was established), I have been told that the law was much, much more in favor of antitrust, too far, in fact. So patent law has been ascendent for the past 30 years, but now it seems as if in the past few years the pendulum is swinging back in the direction of antitrust. Hopefully, the FTC and DOJ will actually try to find a rational middle ground between the two.

(Also, the statue of Man Controlling Trade is awesome, somewhat Art Deco but very organic in the motion it captures, and is easily my favorite non-monument statute in DC.)

Balto submitted comments to the FTC on behalf of the restaurant group and the Food Marketing Institute. It's telling that such groups felt compelled to comment on this issue at all, and it suggests the economy-wide scope of the patent troll problem. The National Restaurant Association comments suggest that the FTC use its powers to conduct a 6(b) study focused on:

Now there's a group you wouldn't think patent trolls would even bother with.

This is a nice step in the right direction, and I'm very happy to see an FTC with more gumption, but using one government agency to fight the effects of another seems inefficient. Seems like it would just be easier to pass comprehensive patent reform (e.g., dramatically higher burden of proof, crowd-sourcing the hunt for prior art, no software patents, no gene patents)

Maybe when we get a new set of Congress critters it would be easier to pass reforms.

I should patent the act of discharging a semiautomatic firearm with the visual assistance of a directed beam of light. I could make millions suing people! :-D

While certainly in some areas patents might seem obsolete, that is a red herring I think, because the root problem is simply the granting of patents for non-exceptional work. Patents have to be *special*, not the rubber stamp you apply to every week's work. They just have to apply the "unobvious" and prior-art law that is already there to a considerably higher standard.

My favorite example of the kind of thing patents are made for is Lonnie Johnson's Thermoelectric Energy Converter, which is still in development. Here is a truly new, amazing new kind of heat engine with no moving parts, that could conceivably someday be a link the chain that processes almost all our power. But it is going to take years and years of development, and how are they going to get the capital to do that development if the investor knew that any cheap third-world company in the world could just pick up the final product design and put them out of business right out the door? Hmm? Software shouldn't be different, but you should have to have something special to be given that protection.

1. Software patents2. Patents on ideas like combining two patented technologies. Screen with fingerprint reader for example.3. Low quality or duplicate patents.4. Submarine patents.5. If two people file similar patents within a year or two then they both should be I validated for being too obvious.

While certainly in some areas patents might seem obsolete, that is a red herring I think, because the root problem is simply the granting of patents for non-exceptional work. Patents have to be *special*, not the rubber stamp you apply to every week's work. They just have to apply the "unobvious" and prior-art law that is already there to a considerably higher standard.

My favorite example of the kind of thing patents are made for is Lonnie Johnson's Thermoelectric Energy Converter, which is still in development. Here is a truly new, amazing new kind of heat engine with no moving parts, that could conceivably someday be a link the chain that processes almost all our power. But it is going to take years and years of development, and how are they going to get the capital to do that development if the investor knew that any cheap third-world company in the world could just pick up the final product design and put them out of business right out the door? Hmm? Software shouldn't be different, but you should have to have something special to be given that protection.

Software should be and IS different, and legal loopholes are used to bypass this simple fact (apparently your cell phone is a completely different device when you install a new application on it; that's the aspect of law they're twisting to justify it). Further, they saw explosive innovation when there were no software patents, and it has slowed down considerably since, to the point that startups are nearly impossible. Finally, it already has copyright protection (which is also broken, with regard to fair use protections and term lengths), which is, was, and will continue to be sufficient.